Challenges & Opportunities: 2008 Profile of the Electrical Contractor

For more than 50 years, ELECTRICAL CONTRACTOR magazine has listened carefully to its readers through a biennial survey that delves into how electrical contractors conduct their businesses. The data opens our eyes to what is truly happening on job sites around the country and on the front lines of electrical construction.

We don’t claim to have a crystal ball, but if you read between the lines and apply years of industry experience, it’s not a drastic leap to predict what lies ahead. We can fore-see obstacles and opportunities and tell you how you compare with your peers. Perhaps we can provide some tips that will help you grow your bottom line, even in a difficult economy. Finding this useful information could be the difference between end-of-year bo-nuses and layoffs at your company.

Company size

The first thing we must know is what the typical electrical contracting firm looks like. About 70 percent have less than 10 employees and annual revenues of less than $1 million. There are more small firms (69 percent) than there were two years ago (63 percent). In a related finding, the percentage of very large firms (those with more than 100 employees) has shrunk from 11 percent in 2004 to a mere 6 percent in 2008. This trend can be attributed largely to industry consolidation through mergers and acquisitions (see Tables 1 and 2).

Age: the looming threat

The average age of respondents is 51.5 years old, up from 50 in 2006 and 48.6 in 2004. About half are older than 35, which suggests a younger generation of electrical contractors is not filling the leadership pipeline. Respondents between ages 35 and 54 make up 52 per-cent, which is down from 58 percent in 2006. At the same time, the group of 55 and older—those closest to retirement—grew signifi-cantly from 33 percent to 39 percent in two years (see Table 3).

The youngest age brackets are shrinking while the older age groups are growing. Like other industries, electrical construction is set for a major shift in leadership. Experienced leaders and employees will retire en masse in the coming two decades, leaving a dearth of leadership and experience behind, unless succession planning is in place and younger people are groomed for leader-ship roles. Many electrical contracting firms may be sold or simply close their doors in the coming decades, if these issues aren’t addressed. During a slumping economy and housing downturns, the age of those in an industry makes companies especially vul-nerable to closing their doors, especially with uncertainties about the future.

Education

A majority of respondents have some college education, regardless of company size. Twenty-five to 30 percent got their formal training through an apprenticeship or at trade or vocational school. There are few differences in education by size of employer, except those in firms with one to nine employees are more likely to have apprenticeship, trade or vocational training (see Table 4).

Race: still lopsided

Eighty-seven percent of ECs in this survey are Caucasian, 7 percent are Hispanic, 4 percent are African-American and 1 percent are Asian. Firms with 10 or more employees are far more likely to employ minorities in field and management positions compared with smaller firms.

Residential vs. CII

Although, on average, the greatest portion of electrical contractors’ revenue comes from commercial/industrial/institutional (CII) work on a combined basis, single-family housing accounts for the largest single source of revenue. Inside the housing category, a higher percentage of revenue comes from multifamily housing of one to five stories compared with taller residential buildings.

Despite the housing crisis, electrical contractors derived about the same percentage of average revenue from single--family home construction in 2008 as they did in 2006. The clearest indicator that the housing market downturn has impacted electrical construction can be seen in the average 3 percent rise in commercial construction among the total sample versus 2006. In other words, if ECs were pinched in the housing market, they may have found some refuge in commercial work.

The biggest concern for the group of electrical contractors with fewer than 10 employees is that they rely most heavily on single--family housing for revenue. These small companies derive about half of their work from the single--family market, so they may have felt the strongest blow from the housing crisis. The largest firms (100-plus employees), conversely, may have been largely protected from the housing bust because a disproportionate percentage of their revenue comes from CII projects and nonbuilding work, such as trans-portation lighting, airport runway lighting, highway and street lighting, traffic controls, and utility work.

During the good times, when houses were going up fast and selling faster, the smaller firms may have reaped the rewards, while the CII contractors may have struggled. It’s cyclical, so weathering the tough times may require a better balance of residential and CII work (see Table 5).

Types of work

Not surprisingly, 96 percent of electrical contractors said they performed traditional power/lighting work in the previous year. Two-thirds said they had worked on power quality, communications/systems connectivity and automation controls (CII). About 60 percent worked in residential automation/controls, and about 30 percent worked in alternative energy/sustainable building technology. The percentage of contractors that worked on automation/controls in the residential market declined from 62 percent in 2006 to 57 percent in 2008. That shift also could be attributed to a downturn in the housing market and more contractors turning to CII work to offset losses in the residential market (see Tables 6 and 7).

CII automation/controls work is more likely to be performed by companies with more than 10 employees. Communica-tions/connectivity is more likely to be done by firms with 20 or more employees. Alternative energy work is more likely to be done by electrical contractors with more than 100 employees. Companies with 10 to 19 employees are more likely to work on whole-house automation projects, while firms with fewer than 10 employees are more likely than any other size companies to work on home thea-ter/sound projects.

On average, new construction

(42 percent) and modernization/retrofit (27 percent) account for the lion’s share of revenue for electrical contractors. Average revenue from repair (15 percent) is comparable to the combined percentage of maintenance service contracts (6 percent) and maintenance work not done under contract (10 percent). However, new construction plays a greater role among firms with 10 or more employees. Repair work, conversely, accounts for an average of 18 percent of revenue for firms with less than 10 employees but only an average of 7 percent among firms with 10 or more employees. We perhaps can attribute this trend to economic pressures; when homes aren’t being built, remodeling activity grows.

Electrical/power distribution continues to account for the largest percentage of company sales, by far, at 64 percent. It has been trending downward, however, since 2004 when it was 69 percent. Electrical power and distribution now account for less volume of larger firms than of smaller firms. In 2006, that was not the case.

By comparison, industrial systems work (motors, motor controls, etc.) accounts for about 9 percent of revenue among all survey re-spondents, but for a substantially larger percentage of revenue among firms with 100-plus employees (16 percent).

Similarly, security and life safety work on a combined basis accounts for a substantially larger percentage of revenue among firms with 20 or more employees than among smaller firms.

Forty percent of ECs are actively engaged in systems integration or data center work, with low-voltage systems integration mentioned the most. Companies with 20 or more employees are significantly more likely to perform in these types of work than smaller compa-nies (see Table 8).

Expanded role: a trusted partner

About 80 percent of firms performed some design/build or design/assist work in 2007. Larger firms are more likely than their smaller counterparts to have engaged in design/build or design/assist work. While 73 percent of firms with less than 10 employees performed any design/build or design/assist work in 2007, 85 percent of firms with 10 to 19 employees, 91 percent of firms with 20 to 99 employees and 88 percent of firms with 100 or more employees performed any of this type of work.

Overall, an average of 47 percent of ECs’ revenue was from either design/build or design/assist. This is a significant increase from the 2006 level of 43 percent. On average, 34 percent was done as design/build, and 13 percent was done as design/assist. Less than half of electrical contractors’ average revenue comes from traditional bid/build projects (46 percent), and about 7 percent comes from other methods of bidding (see Tables 9 and 10).

This trend shows that general contractors are increasingly trusting electrical contractors as partners at the early stages of projects. They also are trusted to finish incomplete plans.

Plans, specs and brands

About 80 percent of all electrical contractors report receiving some plans and specs that were incomplete (that is, where their firm is responsible for completing the design documentation). Respondents say that, on average, plans and specs are incomplete 46 percent of the time. About 30 percent who work on each type of construction say a higher percentage of the plans and specs they now receive are incomplete compared with five years ago. This is consistent across the three construction types—single-family, multi-family and CII building. About half of those who work on each of these building types say the completeness of plans and specs is no different than it was five years ago. Only about 10 percent who work on each building type say a lower percentage of the plans and specs are now incom-plete compared with five years ago (see Table 11).

Interestingly, firms with fewer than 10 employees, which tend to derive a higher percentage of their revenue from single-family residential work, also are more likely to say a higher percentage of plans and specs are now incomplete. Thirty percent of firms with fewer than 10 employees said a higher percentage of the plans on single-family residential projects are now incomplete, while only 22 percent of firms with 10 or more employees said a higher percentage of plans on single-family residential projects are now incom-plete.

Also, firms with 10 or more employees who tend to derive a higher percentage of their revenue from CII projects are more likely to say a higher percentage of the CII plans and specs are now incomplete. Only 22 percent of firms with less than 10 employees said a higher percentage of plans on CII projects are now incomplete, while 42 percent of firms with 10 employees or more said a higher per-centage of plans on CII projects are now incomplete.

Brand matters, too. Respondents were shown a list of four options and were asked what percentage of the specifications their com-pany receives fall into each category. On average, a single brand is specified less than 25 percent of the time. In all other cases, other fac-tors—multiple brands, “or equal to” or performance specified—come into play (see Table 12).

Respondents then were asked how much discretion they have in making a brand substitution. Overall, contractors are able to make brand substitutions about 70 percent of the time. Making brand selections and substitutions is crucial to electrical con-tractors’ performance and, therefore, is critical to the contractor’s reputation (see Table 13).

Availability and price are the top reasons for original brand selection. Availability and price were chosen by 70 percent and 65 percent, respectively, of electrical contractors as either their first, second or third reason for initially selecting a brand. Ease of installation, prior experience, durability and manufacturer reputation form a second tier. Each was chosen by between 40 and 50 percent as a top reason for initial brand selection (see Table 14).

Compared with 2006, price declined significantly as a top reason, from 70 percent to 65 percent in 2008. During the same time, manufacturer reputation was cited significantly more often (43 percent vs. 36 percent) as was word of mouth.

Availability and price also are the top reasons for brand substitution. Compared to two years ago, significantly fewer electrical con-tractors cite availability as a top reason (79 percent vs. 84 percent), while more cite manufacturer reputation (30 percent vs. 26 percent) or word of mouth (14 percent vs. 11 percent). Perhaps the Internet has made products more readily available in the last two years. Also, enhancements in distribution channels may have contributed to this trend.

Availability and price are more important as reasons for substituting a brand than for its initial specification, according to the sur-vey. In contrast, prior experience, durability and manufacturer reputation assume higher importance—in the original specification—when time considerations play less of a role.

Manufacturer reputation clearly is a big draw for ECs when specifying products for a job, which is why the emergence of counterfeit goods has sparked such concern in the industry.

Counterfeit goods: troublesome but elusive

There is a high level of concern regarding the effectiveness and ability of counterfeit electrical goods to meet codes, but at the same time, there also is a fairly high level of uncertainty about whether the electrical contractor is encountering counterfeit electrical products, tools or materials in their work (see Table 15).

About 60 percent are extremely (29 percent) or very (31 percent) concerned about the effectiveness of counterfeit products and their ability to meet codes, but 43 percent say they are not sure if they have encountered counterfeit electrical goods in the past year.

An additional 33 percent say they have never encountered counterfeits. Combining that third with a high percentage who say they are not sure reveals a potential need for contractor education in this area.

Those in small firms are more likely to be highly concerned about counterfeit electrical goods compared to those in larger firms (63 percent extremely/very concerned among firms with less than 10 employees vs. 54 percent among firms with more than 10 em-ployees). Electrical contractors in firms with 100-plus employees are more likely than other firms to say they never encounter coun-terfeit electrical goods (45 percent).

With reputations on the line, counterfeit goods and tools are a growing concern that needs to be addressed. When contractors acci-dentally install counterfeit products that fail, they have to go back and fix the problem. That costs time and money, two precious com-modities in this industry. If ECs get called back to fix something, their chances of getting a call-back for new work go down dramati-cally, so avoiding counterfeits is critical to their future prospects.

Training and topics of interest

Also critical to your future is training. More than 60 percent of electrical contractors say that they, or someone in their firm, have taken training in the past 12 months or plan to take training in the next 12 months to improve or broaden skills or attain certification. This training could be online, by correspondence or in a classroom.

There is no statistically significant difference between the percentages that took training (61 percent) or that plan to take training (66 percent). However, future interest is significantly higher in courses on energy use and design/build (next 12-month course work vs. past 12-month course work) (see Table 16).

Interest in energy jumped dramatically: energy use, green/sustainable building and Leadership in Energy and Environmental Design (LEED) certification on a pooled basis were mentioned by 30 percent of those who plan to take training in the next 12 months vs. 18 percent who took training in the past 12 months.

Contractors also were asked what they want to know more about. Only changes in the National Electrical Code (NEC) trumped green/sustainable building technology in the amount of respondents seeking information. Sixty-eight percent said they want to know more about the NEC changes. Fifty-two percent said green/sustainable building technology was something they need to explore more closely. Interest in green/sustainable building technology was way up compared to 2006, from 28 percent to 52 percent—nearly twice as much interest.

Green movement

Clearly, there’s a heightened awareness among all industries that energy efficiency is a priority. Electrical contractors, particularly firms with 100 or more employees, have embraced this market. According to the survey, almost half of ECs (46 percent) worked on projects in 2007 that included green/sustainable building elements. On average, 9 percent of revenue comes from this type of project.

Thirty percent of electrical contractors have worked in one or more of the following areas: LEED projects, solar photovoltaics, wind generation, net metering and cogeneration. While 27 percent of firms with less than 10 employees performed this type of work, 57 per-cent of firms with 100 or more employees engaged in this type of work. Larger companies tend to land more government projects, where LEED has evolved as a new standard. The U.S. Green Building Council (USGBC) developed the LEED green building rating sys-tem in 1998. Since then, LEED has grown exponentially and has become a standard in many government projects. Electrical contractors that are best suited to bid on large government jobs will benefit the most.

Conclusions

Analyzing the survey produces some interesting information. An aging industry is a looming problem that must be dealt with now. There’s a green movement in the industry, and training needs reflect that. The housing crisis affects smaller firms more than the largest companies. There’s refuge in CII work. Counterfeit goods threaten electrical contractors’ reputations, so they should have better con-trols in place to detect faulty goods. ECs are gaining more respect when it comes to designing jobs and specifying products.

Now that you have a better idea how you stack up to your peers, you can make informed decisions about how to navigate your com-pany through the rough times. To view the complete “2008 Profile of the Electrical Contractor” report, visit www.ecmag.com/research.

Methodology

The survey was conducted by postal mail and through the Internet among a random sample of ELECTRICAL CONTRACTOR subscribers. As of the deadline for this article, 812 completed surveys were received. Each respondent who received the survey through the Internet was sent two follow-up e-mails. However, follow-up mailings were not made to nonresponders in the postal mail sample. An incentive was offered for participation in the survey: For each completed survey, ELECTRICAL CONTRACTOR magazine would contribute $5 to charity.

The margin of error on the total sample of 812 is +/-5 for percentages around 50 percent (i.e., the difference between 42 percent and 47 percent would be statistically significant at the 90 percent level of confidence). Tables and figures contained in this article come from the data generated by 2008’s ELECTRICAL CONTRACTOR survey, which was conducted by New York-based Renaissance Research & Consulting Inc. (www.renaiss.com), an independent marketing research firm that specializes in the construction industry.

The Internet option was first introduced in 2004. In 2004 and 2006, the proportion of surveys completed through the Internet was approximately 60 percent versus 40 percent for postal mail. In the 2008 survey, the proportion was closer to 50-50.

As was the case in 2004 and 2006, the survey was produced in different versions. However, this year, for the first time, there were four versions instead of three. The postal mail portion was conducted as a five-page booklet, with the first four pages containing core questions that were common to each version. The differences among the versions occurred on the fifth page. The Internet version of the study was essentially the mail portion of the survey posted on the Internet. The major difference was that in the Internet portion, respondents were required, in almost all cases, to have percentage questions add up to 100 percent.

KELLY, a former ELECTRICAL CONTRACTOR magazine editor, is a Baltimore-based freelance writer and author. Reach him via e-mail at writerjmk44@comcast.net.